How Europe Keeps Messing Up in Greece in 1 Chart

By Matthew O'Brien

There's nothing wrong with making a bad prediction prediction. Predictions, as the cliché goes, are hard, especially about the future. But there is something wrong with consistently making bad predictions that affect the lives of tens of millions of people.

The chart below, inspired by Dani Rodrik, looks at how the IMF has done at projecting unemployment in Greece the past few years. The IMF puts out a semi-annual World Economic Outlook to predict a few major economic variables for every country for the next two years. I took the early-year projections for Greece from 2008 through 2011 and show how much they missed on their one-year predictions (BLUE) and on their two-year predictions (RED).

These predictions are bad and getting worse. The second half of that sentence is the disconcerting part. We'd expect policymakers to miss the most when the financial crisis just hit in 2008 and 2009. Not everyone can be Nouriel Roubini. Instead, their predictions have been the most wrong the most recently. And lest you think this might get better soon: the IMF is already well off on its 2012 predictions, and doesn't think things will get any worse from those already too-low levels in 2013.

There are two big stories here. First, the IMF (and Europe) have repeatedly underestimated how much austerity would hurt in the absence of additional monetary easing. Hence, the walloping errors since Greece began closing its deficit in 2010. And second, the models forecasters use assume that the economy will naturally recover on its own -- usually at some point 18 months or so in the future. It won't. At least not in the short-run. This recession is different. It's more pernicious. It's because households are still rebuilding wealth and paying down debt after the credit bubble burst.

This isn't just a Greek problem. The same Panglossian attitude has gripped policymakers the world over, just not to quite the same extent. In the U.S., the Federal Reserve continues to project prosperity just around the corner -- if the corner is three years from now. The tragedy is that the belief that things will get better soon -- the economic equivalent of a Friedman Unit -- is a constant justification for inaction. Why do more if unemployment will soon come down without doing more?

That's how you get a situation where more than one in seven people can't find full-time work four years after the recession began.

It's time for a little more realism. We can handle the truth. We need our policymakers to as well.